Egregious lack of competition in the sky

I came across this short clip by CNBC on the dominance of Boeing and Airbus in the sky. The two companies are the two major players in a lucrative industry with incredible high entry barriers. They or at least Boeing has a close tie to the government as it is the second biggest vendor for government contracts.

It’s a bit ironic that Boeing enjoys the influence and the lack of the competition that it has while government officials all seem eager to publicly end the alleged monopolies of tech companies. I said alleged since it’s not really clear cut to determine whether companies like Amazon are a monopoly even though many deem it to be. I am not saying that tech companies should be allowed to function in a monopolistic competition. But if fighting to avoid monopolies and to preserve consumers’ best interest is necessary, Boeing should be one of the first companies to be scrutinized.

If you remember the saga Boeing has had with its 737 Max this year, it’s even more unbelievable to see Boeing dominate the market. Even with its position and power, Boeing still tries to cut cost and bolster the bottom line at the expense of the very utmost thing they should be responsible for: safety.

Apple’s multi-sided game

There were quite some surprises unveiled at Apple Event today:

  • Apple Arcade: $4.99/month for a whole family
  • Apple TV+: $4.99/month for a whole family and free if you buy a new iPhone, iPad, Apple TV or Mac
  • Price cuts for devices such as iPhone and Apple Watch Series 3

For a company notorious for ripping off consumers, a notoriety that they earn to a large extent, undercutting competitors and lowering prices for their high-end products are unusual. However, it may make sense in the game that Apple is playing.

Formerly relying on hardware, especially iPhones, for their revenue, Apple has been transitioning to be more of a service company. They have been pushing hard on the service part, including but not limited to Apple Pay, iCloud, Apple Card, Apple News+, Apple Arcade, Apple Care. However, to sell these services, they first need to find a way to put hardware into humans’ hands.

In return, hardware would be just boring pieces of metal without great user experience that comes from the operating system and ecosystem, including apps and services. There is no shortage of alternatives to expensive products that Apple offers. To really convince a consumer to dole out a significant amount, they need to present compelling reasons. Hence, the gradual updates to operating systems and a slew of services.

But Apple can’t do everything alone. They need partners. They need content partners such as publishers, game companies and producers as well as strategic partners like Goldman Sachs. These partners, I guess, are interested in the reach that Apple has through its installed base. By working with Apple, they hope to leverage the media coverage that Apple enjoys and get to many customers as quickly as possible.

By lowering entry prices for Arcade and offering TV+ on a very attractive term, I suspect that Apple wants to expand the subscriber base quickly from the existing user pool. The bigger the subscriber base, the more leverage Apple will have with content and strategic partners, whose future creations in turn will increase the appeal of Apple’s services.

By lowering hardware’s prices, there may as well be other reasons and I am so speculating here, Apple wants to lure non-Apple users and expand its user pool. It’s a two-pronged approach to grow the ecosystem.

It’s truly remarkable to me how a company this size can keep adapting to the changing landscape of the business environments to be competitive in a highly competitive industry. Some folks say Apple isn’t taking risks. But any strategic mistake by omission or commission may result in at least two years behind competitors and billions in market valuation. Others complain that the Cupertino-based company is no longer innovating. It’s tricky to tell if it’s completely true or false. But it’s worth remembering that Wearables & Accessories, including Watch and Airpods, generated $5.5 billion in revenue in 90 days last quarter while the main products still remain sticky to consumers.

As a student of business, I admire the company. No company is flawless, but it’s amazing what Apple has been able to do to navigate through competition and constantly changing business environments.

Disclaimer: I do own Apple stocks in my humbly small portfolio.

AB5 threatens the existence of gig companies like Uber & Lyft

Yesterday, Gizmodo reported that AB5, a bill that is aimed to force gig companies to treat their workers as employees instead of independent contractors as they are now, passed California’s Senate Appropriations Committee and will go to a full vote in the Senate next month. If passed, it is expected to be signed into law by the Governor.

AB5 stems from a decision by a California Supreme Court decision in 2018, which essentially decrees that “Workers must be treated as employees, not independent contractors, if their jobs are central to a company’s core business or if the bosses direct the way the work is done.”, according to LA Times. According to the ruling, ride-hailing businesses cannot exist without drivers and drivers have to follow certain standards to be able to operate on their platforms. Hence, they should be treated as employees.

Ride-sharing companies exist as middlemen between riders and drivers, managing the supply of drivers and demand for rides. Drivers no longer have to drive around to pick up riders. Surge pricing gives drivers incentives to go out at unpopular hours like early in the morning. The argument that these companies make against AB5 is that drivers have flexibility to choose when and where to work, and as a result, shouldn’t be classified as employees. Well, even as employees, drivers can surely negotiate with Uber or Lyft that right. One of my colleagues moved from Omaha to Austin to work remotely so that she can be with her husband. What is at stake here is the bottom lines.

Gig companies like Uber or Lyft haven’t made any money despite treating their workers as independent contractors. If the proposal is signed into law, it will mean higher operational costs as these companies will need to pay minimum wages and be responsible for other benefits to their employees. Any chance of profitability will become even slimmer.

To be fair to Uber and Lyft, what they have done so far is perfectly legal as up to now there is no law that regulates the industry. They just take advantage of the situation and the bargaining power that they have over drivers. On the driver side, each cannot fight with these companies. They need lawmakers.

Regarding lawmakers, they have reasons to help both drivers and ride-sharing companies, especially in the US. Regulators that are more concerned about the well-being of drivers, their constituents as well, will support proposals such as AB5. Those who are more concerned about the power of lobbyists and about staying in power will fight against AB5. Since California is a progressive state, there seems to be more proponents than opponents of AB5. I am not sure the same can be said in other less progressive states or the federal administration.

Neither am I sure that collectively laws such as AB5 will benefit our society, but personally I am for it. Drivers should be protected against the abuse of these gig companies. Eventually, it has been proven that there is demand for services such as Uber or Lyft. I am confident there will be startups wanting to tap into the demand. As for Uber or Lyft, they will either adapt and innovate to survive and thrive or fall into the category of “thanks for being the trailblazers, but perhaps your time is up” companies.

Soaring student debt

The Walls Street Journal had an unbelievable and scary article on the state of student debt in this country

A record $89.2 billion of student loans was in default at the end of June, New York Federal Reserve data show. Of the $1.48 trillion outstanding, 11%, or $160 billion, was at least 90 days behind on repayments—and the true rate is likely double that, because only half the loans are currently in repayment.

Source: WSJ
Source: WSJ

It never stops amazing me how students in this country can get into so much debt by trying to acquire education and the means to make ends meet. A high school friend of mine has a 6-figure student debt with monthly INTEREST payment of $500. I personally know people from my university in Omaha who accumulated debt and struggle to find jobs. Jobs may wait to meet us, but the bills and interest usually can’t wait to break us.

There is a proposal from some politicians to wipe out student debt. It’s impractical and what problem does it solve? The debt will fast pile up again for the next generations. I don’t think anything will change unless there are solutions to the issues:

  • Ridiculously expensive tuition fees for degrees that fast decrease in value
  • Laughable expensive books that benefit no-one but publishers and professors who work with them
  • Lack of knowledge on personal finance by students

Of course, the reality is highly complicated. Yet, I believe it would be hard to think of a worse scenario than what we currently face. Real solutions should be in place, yet the graph above shows that none has been since 2004. Else, the amount would have gone down instead of going up. If other countries such as those in Nordic countries, France or Germany or many other in Europe can get it done, why can’t the US?

Notes from Datadog’s S-1

Below are my personal notes from reading Datadog S-1. All numbers and charts below are from the filing

What is Datadog?

I found these two graphs very descriptive of Datadog’s history and MO

Growth

Stickiness

These quotes from the filing showed that customers seem to enjoy what Datadog has to offer. Their list of customers includes some famous names as follows:

  • Coinbase
  • Comcast
  • Expedia
  • HSBC
  • News Corp UK & Ireland
  • Peloton
  • Starbucks
  • Twilio
  • Wabtec
  • Zendesk

We have seen increased traction with enterprise customers, a testament to our success and ability to grow. As of June 30, 2019, the average ARR of our enterprise customers, defined as having 5,000 or more employees, was approximately $200,000, which has increased from approximately $120,000 as of December 31, 2017. The average ARR of our mid-market customers, defined as having between 1,000 and 5,000 employees, was approximately $140,000, which has increased from approximately $70,000 as of December 31, 2017. No customer, including any group of customers under common control or customers that are affiliates of each other, represented more than 10% of our revenue in 2017 or 2018

Each cohort represents customers that made their initial purchase from us in a given year. For example, the 2014 cohort includes all customers as of the end of 2014. This cohort increased their ARR from $4.8 million as of December 31, 2014 to $19.2 million as of December 31, 2018, representing a multiple of 4.0x. Additionally, the ARR from our top 25 customers as of December 31, 2018 increased by a median multiple of 33.9x

As of June 30, 2019, approximately 40% of our customers were using more than one product, up from approximately 10% a year earlier. Additionally, in the six-month period ended June 30, 2019, approximately 60% of our new customers landed with more than one product, up from approximately 15% a year earlier.

Competition

Datadog admits to have quite a fearsome group of competitors across different product offerings

With respect to on-premise infrastructure monitoring, we compete with diversified technology companies and systems management vendors including IBM, Microsoft Corporation, Micro Focus International plc, BMC Software, Inc. and Computer Associates International, Inc. 
 
With respect to APM, we compete with Cisco Systems, Inc., New Relic, Inc. and Dynatrace Software Inc.
 
With respect to Log management, we compete with Splunk Inc. and Elastic N.V. 
 
With respect to Cloud monitoring, we compete with native solutions from cloud providers such as Amazon.com, Inc. (AWS), Alphabet Inc. (GCP) and Microsoft Corporation (Azure).

Operating Losses

Similar to many other SaaS technology companies, Datadog consistently registered operating losses in every quarter in the last three years, except for two quarters

Capital efficiency and Total Addressable Market

According to Gartner, enterprises will quadruple their use of APM due to increasingly digitalized business processes from 2018 through 2021 to reach 20% of all business applications. According to Gartner, only 5% of applications were monitored as of 2018.According to Gartner, enterprises will quadruple their use of APM due to increasingly digitalized business processes from 2018 through 2021 to reach 20% of all business applications.

Datadog S-1

Datadog raised a total of $92 million in capital and as of June 30, 2019, still had around $64 million in cash.

WeWork S-1

This week, WeWork, that famed coworking space startup, filed its paperwork to go public. Here are my takeaways

The Positive Stuff

WeWork grew dramatically in terms of revenue, workstation capacity, memberships, run rate revenue and committed revenue backlog which as of June 30, 2019 is approximately eight times that as of December 31, 2017.

Enterprise memberships which refer to companies with more than 500 employees make up of 40% of all memberships and new locations seem to be filled up quickly

Net Capex per WorkStation added has gotten smaller

The not-so-positive stuff

While revenue grew fast, so did losses. WeWork lost money as quickly and almost at the same rate as they generated revenue. And the company continued to lose money to the tune of approximately $1.7 billion last year and $1.3 billion in the first half of 2019.

The company is projected to continue losing money from its operations and keep investing in new leases and workstation. The contractual obligations run up to $47 billions in the future. It remains to be seen whether the company will start generating profit and honor such a sizable obligation. On top of that, the majority of WeWork’s revenue comes from the US and recently, the inverted yield yesterday which caused one of the worst drops in the stock market’s history is seen as a sign of upcoming recession in two years. One of the concerns about WeWork is whether they can operate in recessions with huge fixed costs in the form of long-term leases.

Additionally, what stood out from WeWork’s S-1 for me is the influence of the CEO and his wife. Here is what the S-1 has to say about the Neumanns

We have entered into a number of transactions with related parties, including our significant stockholders, directors and executive officers and other employees. For example, we have entered into several transactions with our Co-Founder and Chief Executive Officer, Adam Neumann, including leases with landlord entities in which Adam has or had a significant ownership interest. We have similarly entered into leases with landlord entities in which other members of our board of directors have a significant ownership interest, such as through ARK (as defined in “Business—Our Organizational Structure—ARK”).

In the event that Adam is permanently disabled or deceased during the ten-year period commencing upon the completion of this offering, a committee will be formed for the sole purpose of selecting a new Chief Executive Officer. The composition of this committee will be as follows:

Bruce Dunlevie and Steven Langman, who are currently members of our board of directors and members of our compensation and nominating committee, to the extent they are then serving as our directors, will serve on this selection committee with Rebekah Neumann (with the size of the committee fixed at two or three, as applicable); and

if neither Bruce nor Steven is then serving as one of our directors, Rebekah will choose one or two board members who are serving at the time to serve on this selection committee with Rebekah.
In the event that Rebekah is not able to serve as described above, the trustee then acting on behalf of Rebekah and Adam’s estate will serve in all such capacities and make all such determinations. In addition, Adam and our board of directors have a process in place to designate an interim CEO in order to give the selection committee time to select a long-term CEO. Any selection of an individual to serve as our Chief Executive Officer must be made with the unanimous approval of the selection committee.

The company entered into leases with some buildings as soon as Adam acquired ownership of those buildings

For one of these four properties, we entered into a lease agreement with the landlord/partnership entity within one year following Adam acquiring his ownership interest, and in the other three cases we entered into a lease agreement with the landlord/partnership entity on the same day that Adam acquired his ownership interest. During the years ended December 31, 2016, 2017 and 2018, we made cash payments totaling $3.1 million, $5.6 million and $8.0 million to the landlord/partnership entities under these leases. During the year ended December 31, 2018, we received payments from the landlord/partnership entities in the form of tenant improvement reimbursements of $11.6 million related to these leases. During the six months ended June 30, 2019, we made cash payments to the landlord/partnership entities totaling $4.2 million under these leases and received no tenant improvement reimbursements related to these leases. As of June 30, 2019, future undiscounted minimum lease payments under these leases were approximately $236.6 million, which represents 0.5% of the Company’s total lease commitments as of June 30, 2019.

The company paid almost $6 million for the We trademark which was owned by WE Holdings, which is controlled by its own directors

In July 2019, WE Holdings LLC assigned residual rights related to “we” family trademarks to the Company, which we desired to obtain following our rebranding in early 2019. In consideration of this contribution and in lieu of paying cash, the Company issued to WE Holdings LLC partnership interests in the We Company Partnership with a fair market value of approximately $5.9 million, which was determined pursuant to a third-party appraisal.

Even though he will function without an employment contract, Adam will have total control over the direction and decisions of WeWork due to his ownership of B and C class shares. His influence isn’t particularly reassuring given how much has been written about the chaos at WeWork. I had one here

The grand vision which sometimes seems closer to delusion than ambition to me is reflected within the first sentence of the S-1 form.

Mission: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness”

I literally have no idea what “elevate the world’s consciousness” means and how a real estate company, not a tech one no matter how much they try to portray themselves so, can turn those words into actions and reality.

Notes from Uber’s earnings call

Uber released their 2019 Q2 results and earnings today. Below are a few things that are worth noting to me

Take rate

Uber defines take-rate as adjusted net revenue divided by Gross Bookings. Basically it is how much Uber takes out of your trip’s fare. Compared to Q2 2018, all take rates went down


Q2 2018Q2 2019
Ridesharing Take Rate21.86%18.99%
Uber Eats Take Rate12.4%9.95%
Total Core Platform Take Rate20.96%17.20%

Part of the reason for the drop in take-rate is the rise of Excessive Driver Incentives. For instance, Uber Eats’ Excessive Driver Incentive this quarter went to 43% of the revenue, compared to 36% in Q2 2018.

Source: Uber

Story of Growth?

It’s no secret that Uber is not profitable and likely won’t be for a while. Their story is one of growth, which is not the case in this quarter as far as I am concerned


Gross BookingsCore Platform Gross BookingsMonthly Active Platform Consumers
Q2 2019 YoY Growth29.67%30.44%30.26%
Q2 2018 YoY Growth48.64%47.92%33%

TripsAdjusted Net RevenueCore Platform Adjusted Net Rev
Q2 2019 YoY Growth35.02%12%7%
Q2 2018 YoY Growth39.71%58%54%

Every metric saw a smaller growth this quarter compared to last year. I do get the laws of big numbers, but when your story is one of growth, this may raise a few concerns.

Among important markets, Latin America saw a 24% decline this quarter despite Buenos Aires becoming the fifth largest city based on trips

Spectacular loss

Uber reported a $5.5 billion loss from Operations. If we take away the stock-based compensation, the loss is still $1.4 billion. While revenue grew by 31%, the operational loss increased by some 89%.

Thoughts

In my opinion, there is nothing in the earnings call from Uber that conveys something remotely close to a clear path to profitability. The story of growth is challenged in this quarter. Perhaps, this is just a bad quarter and the next ones will be better. Or worse. Who knows? Self-driving cars are years and years away, not even 5 years from now. Uber also faces heightened competition in food deliver like Post Mates or Door Dash, companies that attracts big private money as well.